Mr. Buffett's Battery Bet

Once upon a time, Omaha, Nebraska was a distant outpost of the electric car revolution. We had our yearly OPPD/NPPD PowerDrive program and here and there a couple individuals experimented with electric cars, mostly relics from the oil crisis of the late 1970s. For me to see and/or drive a state-of-the-art electric vehicle, I had to fly to Detroit or one of the coasts. That changed this weekend.

With my shiny Berkshire Hathaway press badge around my neck and my camera bag over my shoulder, I walked into the Qwest Center in downtown Omaha -- a 20-minute drive from my home -- and made my way towards the exhibition hall, but not before peeking into the 18,300-seat arena where the legendary Warren Buffett and his "sidekick" Charlie Munger were answering shareholder questions way down on the arena floor. The place was packed clear to the "gods", those seats up near the ceiling. It was standing room only. Giant televisions screens displayed the two investment demigods talking about the state of Berkshire's investments (book value down 6 percent, while profit fell about 12 percent) and the fate of the economy (inflation lies ahead).

The 194,000 square feet exhibition hall was wall-to-wall with Berkshire Hathaway companies from Clayton Homes to Nebraska Furniture Mart to See's Candies to MidAmerican Energy. Set up along the walls were bleachers filled with more of the estimated 35,000 shareholders (a record) were seated watching remotely the Q&A session with Buffett and Munger in the adjacent arena. Those not absorbed in the insights of the company founders, milled about the exhibits eating Dairy Queen ice cream bars -- another Berkshire holding.

As I wove through the exhibits, I finally spotted the MidAmerican exhibit and found BYD's display vehicles, the same ones they debuted at the Detroit Auto Show: a cut-away-model of the F3DM plug-in hybrid, a full operating version of the F3DM and the E6 all-electric crossover.

As a constant stream of people moved between the cars -- making it impossible to get a clear photograph of any of the cars -- I cornered Sara Schillinger, MidAmerican's VP for Corporate Communications and arranged to have her team coordinate getting a one-on-one interview with MidAmerican CEO David Sokol, considered one of three possible Buffett successors.

I then met up again with BYD's Patrick Duan -- pictured above -- who I met in Detroit. It was from him that I was able to glean more information about the company's plans for their vehicles.

I began by asking him about the reported low sales numbers of the F3DM. He explained that the company is concentrating initial sales to corporate and government fleets, a strategy also employed by Ford, GM and Toyota. Additionally, there is a report from Shenzhen that the 9-hour recharge time at 110-volts is off-putting to Chinese consumers, as is the current economic malaise and the vehicle's relatively high-price (just under the equivalent of $22,000US) by Chinese standards.

Since I wasn't aware at the time of recent questions about quality of batteries, I didn't ask him about this issue, but the fact that the company has now pushed back the North American introduction to late 2011, early 2012 would suggest that the company may still be working on improving its battery technology.

Duan told me that when the company does bring their plug-in hybrid to North America -- after completing necessary DoT crash tests -- it will be the larger F6DM that it plans to price at between $22,000 and $25,000. The all-electric E6 will sell for $35,000 before any applicable tax credits or incentives.

The company continues to claim that their batteries are capable of 2000 cycles, which in the E6 electric crossover translates into a staggering --and this point, purely theoretical -- 500,000 miles. They also confirmed that their "iron" battery is, in fact, lithium ferrous phosphate (LiFePo).

Since learning that the cars would be in Omaha for the Berkshire annual meeting, I had been asking the company for the opportunity to test drive one of them. Duan said that he had passed my request on to the chairman, but since neither of the cars are certified for operation in North America, they legally couldn't allow them to be driven on any public streets. However, the company did allow Mr. Buffett to drive the cars around the Qwest Center's back parking lot the day before the May 2, 2009 annual meeting.

As Duan continued to hand out BYD brochures like he was giving away free money, I thanked him for his time and moved on to Pat Egan with MidAmerican's Pacificorp, located in Portland, Oregon. I asked him what were MidAmerican's plans for marketing BYD vehicles in North America, as well as reports that the Governor of Oregon was lobbying to bring production of the cars to their state. He quickly dismissed the Oregon initiative saying the state has also been talking to Nissan and Mitsubishi.

On the question of how both companies plan to market the cars when they do come to the United States, Egan said that no decisions have been made, in part because of the current volatility of the market, but also because they are considering various sales and support channels from Internet sales to conventional automotive dealerships.

More importantly, MidAmerican's interest is in BYD's battery technology, not its cars. Egan said that Pacific Power -- a unit of MidAmerican Holdings, itself a unit of Berkshire Hathaway -- is collaborating with BYD battery engineers on what is called an Energy Storage System (ESS) that will enable utilities to store electric power, especially that produced by wind energy. He told me that Sokol believes that ESS eventually will be a far larger market for BYD batteries than its electric car initiative. MidAmerica has large wind farm holdings in Iowa.

After my conversation with Egan, I decided to spend some time interacting with the people stopping by to inspect the cars and and spent the next several hours asking and answering questions about electric cars in general and BYD's vehicles in particular. I found most people genuinely curious about the technology, asking the usual questions about when, how much, how far, how long.

One shareholder from Germany clearly knew a lot about quality auto manufacturing and pointed out flaws in BYD's door designs that could result in crippling injuries to small children and in the uneven quality of paint application. One oriental gentleman kept knocking the sheet metal with his knuckles and grimacing, suggesting he wasn't all that impressed by the quality of the car.

Another gentleman, who is a car dealer, said he was impressed by BYD's cars considering how recent the company had launched its manufacturing efforts. He offered a dealer's perspective on how hard it is today for people to get car loans, and that many of them are $12,00-15,000 "upside down" on their loans. He explained that many people will trade in cars every three years and take on the debt for the new car, adding it to the money still owed on the trade-in. Unless they can pay-off the balance of their debt, car dealers and banks aren't going to make any new loans. Little wonder, MidAmerican and BYD are still evaluating their distribution options.

The overall impression I got from the dozens of people I talked with is that they appreciate Berkshire's foresightedness and that technology like that found in BYD's cars is crucial to reducing the nation's dependence on petroleum, while enabling greater utilization of renewable energy. Many said they would be interested in buying these kinds of cars.

Still, there remain a lot of unknowns about BYD that only time will answer: are their batteries as durable as they claim? Will their cars deliver their promised performance? Will they, as one shareholder charged, spell the doom of Detroit? He answered his own question by stating the only way we can save the U.S. auto industry is to slap a heavy import duty on what will someday be a flood of Chinese electric cars.

If there is a bright spot for the two remaining U.S. automakers to come out of my four-hour sojourn at the Qwest Center, it was that BYD's slipping schedule means the Chevy Volt now will have a 12-month jump on its nearest Chinese competitor, if it can deliver on its November 2010 launch date. Here's hoping they use it wisely and effectively. It may be the only break they get.

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